Month: October 2016

The health care costs that Americans pay out-of-pocket are rising–both in total amount, which is perhaps not a surprise, but also as a share of incomes, which is perhaps more disturbing. Ann Foster discusses the pattern in \”Household healthcare spending in 2014,\”  written as a \”Beyond the Numbers\” short essay for the US Bureau of Labor Statistics (August 2016, vol. 5, no. 13). She has lots of details of spending in particular areas, but here\’s an overall figure showing out-of-pocket spending by households as a total amount (left axis) and as share of total expenditures (right-hand axis).

Part of the reason for this rise is that more Americans have health care insurance with high deductibles: that is, the amount you pay out of pocket before the insurance kicks in. Here\’s some information from the most recent Kaiser Family Foundation 2016 Employer Health Benefits Survey.  The report notes:

\”[T]he share of covered workers in plans with a general annual deductible has increased significantly over time: from 55% in 2006, to 74% in 2011, to 83% in 2016, as have the average deductible amounts for covered workers in plans with deductibles: from $584 in 2006, to $991 in 2011, to $1,478 in 2016.\” 

Another simpler way to describe this information is just to look at what share of workers now have a deductible above a certain amount, like $1,000.  This share has been rising for firrms of all sizes, but especially for smaller firms.

I\’ll add that I\’m not automatically opposed to  higher out-of-pocket spending for certain kinds of health costs. One way of holding down the rise in  health care costs is for patients and health care providers to be more sensitive to the cost implications of their choices. Most kinds of insurance against certain costs or damages–auto insurance, homeowner\’s insurance, and so on–have some form of out-of-pocket cost sharing for this reason. In the big picture, being protected against the risk of health care costs in the tens of thousands of dollars, or more, is quite important, even if it means you aren\’t protected against annual health care costs in the range of a few hundred or even several thousand dollars.

But it\’s also wise to remember that the relatively modest rise in out-of-pocket health care costs above is a mixture of households with relatively little in such costs in most years, and other families that are consistently paying the full deductible–an amount which is rising fast–every year. High and rising deductibles will make a lot of people feel as if their health care doesn\’t offer them much benefit in a typical year.

US housing prices have recovered so that they are more-or-less back to the long-run trend that existed before the price bubble of the early 2000s. The total amount of equity that US households have in the form of housing has largely recovered too. Here, with the help of the FRED website run by the Federal Reserve Bank of St. Louis, is a quick overview of the recent roller coaster ride for US housing markets–which leads to the case for why state and local government should be tweaking their priorities to encourage more homebuilding.

Here\’s the bounceback in housing prices since about 2012. There are rises and falls over time, but the current value isn\’t too far from the trend over the last four decades.

The amount of equity that homeowners have in real estate peaked at about $13 trillion at the top of the housing bubble in 2006, then dropped by $7 trillion by 2009 (!), and since 2012 has rebounded back up to almost $13 trillion again.

Another perspective is to look at homeowners\’ equity in housing divided by GDP, which adjusts for changes in inflation and in the size of the real economy over time. With this adjutment, you can see that homeowner equity was mostly in the range of 50-70% of GDP for the second half the 20th century. The housing bubble pushed homeowner equity up to nearly 100% of GDP in 2006, and the bursting of the bubble dropped it to 40% 2009.

Yet another way to slice this data on homeowner\’s equity is to look at it relative to the total value of the real estate. For example, though the 1970s and into the early 1980s, it was common that about 70% of the total value of real estate was equity for homeowners–while the rest was presumably mortgage debt owed to lenders. But even with the rise in housing prices in the 1990s and early 2000s, the share of that value which was homeowner equity was falling, as homebuyers borrowed more aggressively. when the housing bubble burst and the value of homes dropped, the size of the accumulated borrowing remained. The share of housing value that was home equity dropped almost to 35%, which would have been half the level prevailing back in the 1970s and early 1980s. The share of real estate that is homeowner equity has now bounced back, but is still under 60%.

The movements in housign prices also affect home construction. Here\’s the pattern of new housing starts since the late 1950s. These figures are measured in units of housing starts–that is, not relative to the size of the US population, which was about 180 million back in 1960 compared with 320 million today. The data on housing starts is spiky, but the long run-up for the construction industry from about 1990-2005 is clear enough, as is the dramatic fall in construction after that to the lowest levels seen in this data. . There\’s been a bounceback, but in historical context (and given the larger US population and smaller family sizes), it seems rather modest.

The recent bounce-back in housing prices seems to me different from the rise during the bubble. During the housing bubble in the early 2000s, there was a large amount of building (as shown by housing starts), which was sitting vacant (as shown by the vacancy rate), and financed by borrowed money (as shown by the low level of homeowners\’ equity relative to real estate values at a time when prices were rising). The recent bounce-back in housing prices is happening at a time when construction levels remain relatively low, vacancy rates are at historically common levels, the total value of housing relative to GDP is at historically common levels.

Thus, my sense is that the bounce-back in housing prices isn\’t about a borrowing-driven boom in demand, but is more about limitations on housing supply. Those limitations are not typically a matter of federal policy, but are imposed by state and local governments, and by neighborhood activists and courts, whose efforts have the effect of discouraging construction and keeping housing prices higher than they would otherwise be. Jason Furman, the head of President Obama\’s Council of Economic Advisers since 2013, has forthrightly made this point. Last November, for example, he gave a talk called \”Barriers to Shared Growth: The Case of Land Use Regulation and Economic RentsRemarks,\” where he said: \”I will focus on how excessive or unnecessary land use or zoning regulations have consequences that go beyond the housing market to impede mobility and thus contribute to rising inequality and declining productivity growth.\”

Similarly, the 2016 Economic Report of the President, published last January by the CEA, had this to say (pp. 87-89):

\”Supply constraints provide a structural challenge in the housing market, particularly in high-mobility, economically vibrant cities. When housing supply is constrained, it has less room to expand when demand increases, leading to higher prices and lower affordability. Limits on new construction can, in turn, impede growth in local labor markets and restrain aggregate output growth. Some constraints on the supply of housing come from geography, while others are man-made. Constraints due to land-use regulations, such as minimum lot size requirements, height restrictions, and ordinances prohibiting multifamily housing, fall into the man-made category and thus could be amended to support more inclusive growth. While these regulations can sometimes serve legitimate purposes such as the protection of human health and safety and the prevention of environmental degradation, land-use regulations can also be used to protect vested interests in housing markets. …

\”In addition to housing affordability, these regulations have a range of impacts on the economy, more broadly. Reduced housing affordability—whether as an ancillary result of regulation or by design—prevents individuals from moving to high productivity areas. …  Ensuring that zoning and other constraints do not prevent housing supply from growing in high productivity areas will be an important objective of Federal as well as State and local policymakers.\”

Policymakers and economists have been saying for 10-15 years that China\’s economy needs to shift away from being driven by extraordinarily high levels of investment, together with growing exports, and instead shift to being driven by growth of China\’s own domestic consumption. Maybe it\’s actually starting to happen. Jun Nie and Andrew Palmer discuss some recent evidence in \”Consumer Spending in China: The Past and the Future,\” published in the Economic Review of the Federal Reserve Bank of Kansas City (Third Quarter 2016, pp. 25-49). They begin this way:

\”After steadily declining for nearly half a century, the share of consumer spending in China’s GDP has recently increased. Economists and policymakers widely agree that the share of consumer spending must increase for China to continue its economic development; sustaining growth primarily on exports and investment will become more difficult in the longer run. … Although the recent rise in the consumption share has allayed some concerns about slowing growth in China, it has also spurred discussion over whether this trend is sustainable and whether China will truly become a consumption-driven economy.\”

To put China\’s low consumption patterns in perspective, it\’s useful to remember that in the US, about 65% of GDP is usually accounted for by consumption. In China, consumption was only about half of GDP in 1970s and 1980s–and then the share dropped even lower, falling below 40% of GDP. What\’s happening here is that China\’s consumption was growing, but GDP was growing even faster, so the ratio of consumption/GDP was falling, right up until about 2010.

Nie and Palmer discuss the evidence from economic research on what caused China\’s consumption to fall so low, and whether the modest rise of the last few years seems likely to continue. They focus on a few factors that have been evolving over the decades: the age distribution and \”dependency ratios\” in China\’s population, the trend to urbanization, and China\’s housing boom since around 2000–which is about when the consumption/GDP ratio plummeted even lower. I\’d summarize their story this way.

The \”dependency ratio\” refers to what share of the population is either too young or too old to work, as opposed to being working age. The dependency ratio and consumption tend to rise and fall together. Thus, the dramatic fall in birthrates in China as a result of economic growth (and greater education and incomes for women) along with the one-child policy meant a lower dependency ratio. Basically, fewer children means less consumption spending on children, and more saving.

China has seen a dramatic rise in urbanization. As Nie and Palmer write: \”Over the past five decades, the share of China’s population living in urban areas has more than tripled, rising from 18 percent in 1960 to 56 percent in 2015.\” The common pattern is that people moving to urban areas in emergin economies increase both their production and their consumption, but they increase production by more, and so their rate of saving rises.

Nie and Palmer look at patterns of dependency ratios and urbanization across a \”sample of 24
countries including most Asian countries and large developing countries.\” Based on the common patterns, they find that China\’s fall in consumption/GDP ratio from 1970-2000 is almost completely explained by changes in its dependency ratio and urbanization. But the additional drop in consumption/GDP after 2000 is not explained by these patterns, and they instead attribute this fall to a shift in China\’s housing market. Here\’s their explanation (citations and references to charts omitted):

\”The large jump in the household saving rate from 2000 to 2010 is largely related to development in China’s housing market during this period. Before 1998, most Chinese families lived in government-provided houses; after economic reforms in 1998 removed this benefit, however, most Chinese families needed to buy their own homes. This change triggered rapid growth in the Chinese real estate sector, causing home prices to rise tremendously. Furthermore, as house prices started to increase quickly, housing became a popular investment for wealthy Chinese households, raising demand even further and exacerbating house price increases. Indeed, from 2000 to 2010, house prices
in China increased by about 161 percent. In addition to rapidly increasing prices, Chinese homebuyers faced large required down payments—typically 30–40 percent, but in some major cities as high as 50 percent. As a result, middle-class Chinese households were forced to save a disproportionately large share of their earnings to purchase a home. The saving didn’t end with the purchase of a home—the subsequent mortgage payments constituted additional saving as they increased the homeowners’ housing equity. As Rosenzweig and Zhang argue, this housing market dynamic helps explain the rising saving rate associated with rising housing prices from 1998 to 2010.

\”As the scramble to buy homes after the 1998 reform faded, so, too, did the desire to save for homes. Moreover, young people currently do not need to save as aggressively as the previous generation for home purchases because their parents and grandparents often help them buy a home. Due to the one-child policy, which was introduced in 1979, a typical young couple in China are the sole descendants of four parents and eight grandparents. In China, it is common for parents and grandparents to help their children by paying the high down payment or even paying for the entire house. Small family sizes under the one-child policy allow families to focus their resources rather than spreading them among multiple children or extended family members.

\”Large financial contributions from older generations are feasible for two additional reasons. First, after aggressively saving for several decades, many parents and grandparents are wealthy enough to afford this gift to the younger generation. Second, many households own multiple homes. Based on the 2014 China Household Finance Survey, one out of five urban households owns a second home, meaning that on average, a young couple’s parents and grandparents have one extra home between them in addition to their primary residences. Overall, less pressure for young Chinese couples to save helps explain why the Chinese saving rate has started to decline since 2010.\”

What do these factors imply for the future? China\’s old-age population is beginning to rise, and in October 2015 China\’s government announced that it was shifting to a \”two-child policy.\” China\’s dependency ratio seems set to rise, which should cause consumption to continue rising. Urbanization in China also seems likely to continue, which has tended to hold down consumption in China. The original huge boost in saving from the shift to private housing market has largely run its course (although whether the ongoing boom in China\’s housing prices is sustainable is different issue). Mixing this together and stirring a few times, Nie and Palmer suggest that China\’s consumption/GDP ratio will keep rising in the next few years, perhaps to between 45-50% by 2020–that is, to say, almost back to levels prevailing in the 1980s.

When economists and policymakers talk about \”rebalancing\” China\’s economy toward faster growth of domestic consumption, I think they have a bigger shift in mind. Nie and Palmer describe the changes in China\’s household spending this way:

\”[R]eal [household] spending on transportation and communication increased sevenfold over the last two decades compared with a threefold increase in overall household spending. Transportation and communication is a broad category that encompasses many high-end goods and services that have recently become available to middle-class Chinese households, such as smartphones, laptops, and air travel. Travel services in particular appear to be growing quickly: the number of Chinese outbound travelers has been growing at a double-digit pace for many years, and 2015 marked the fourth consecutive year of China as the world’s top tourism source market … [A]nother component of consumption, educational services, is also growing rapidly. Chinese families now are spending more resources on their child’s education both inside and outside the classroom. In addition to paying tuition both domestically and at foreign colleges and universities, Chinese families are increasingly paying for tutoring and other educational supplements for their children.\”

If China\’s government wishes to boost consumption, it could do more to encourage spending in areas like education and health care, as well as to support consumption and health services for its growing population of elderly.